Yves here. There has been much gnashing of teeth in the US about lackluster productivity growth, with the citied culprits ranging from lack of fundamental breakthroughs to cheap labor costs discouraging investment. Almost entirely absent from consideration is poor management demotivating worker. This article helps fill that gap.

Any organisation that needs to restructure, cut wages, or make layoffs needs to know how the employees who are not affected will respond. This column presents a field experiment which revealed that the perception that employers are unfair – in this case, as a result of layoffs – reduces the performance of employees who have not been not directly affected. As part of the experiment, experienced HR managers were able to successfully anticipate the consequences of unfair employer behaviour on unaffected workers.

Management matters for the success and profitability of companies. We know that simple management practices – including the regular maintenance of machines, optimisation of inventory, or recording types of quality problems – can improve the productivity of companies substantially (Bloom et al. 2013). Many of these management practices relate to the structure of an organisation, in particular its workflow and how it is controlled. But the relationship between managers and workers is also important. This relationship is characterised by both the wage paid to a worker as an incentive to work hard, but also by the worker’s perception that he or she is being treated fairly (Akerlof 1982).

If workers believe that their employer is acting unfairly towards them, this can greatly reduce their performance at work. For example, Mas (2008) demonstrated that the conflict between Caterpillar and its workforce in the 1990s led to lower production quality. It is not clear, though, whether workers react to employer behaviour that they think is unfair only if they are directly affected (for example, through wage cuts or reorganisation), or also if they are not directly affected (their colleagues suffer, but they do not). This distinction is important for any organisation that reorganises or lays off some of its workers.

Random Layoffs

In our new study, we set up a field experiment to measure how unaffected workers react to unfair employer behaviour (Heinz et al. 2017). We rented a call centre and hired 195 employees to conduct a telephone survey in two shifts. Overall, our organisation was very employee-friendly – we paid a generous hourly wage, offered flexible work times, a pleasant work atmosphere, and full discretion to workers how to perform their job. We measured individual performance precisely by the number of calls each worker made during a shift.

We used three treatments to identify the effect of unfair employer behaviour on the performance of unaffected workers:

In the ‘no-layoff’ treatment, staff remained unchanged for the second shift

In the ‘quasi-layoff’ treatment, we reduced our staff by 20% between shifts, but did not say there had been a layoff to the remaining workers (they were told only that fewer staff would be present for the second shift

In the ‘layoff’ treatment, we reduced our staff by 20% and communicated the layoff to the remaining workers: “The reason for this [the staff size reduction] is that we decided to lay off some of your colleagues. This allows us to reduce our costs. The selection of laid off workers has been random,” we told them.

To keep the remaining workers’ prospects constant (in the only remaining shift), we made explicit that there would be no future employment possibilities in our organisation. We also paid the wage upon arrival for each shift. This meant that workers in the ‘layoff’ treatment knew at the beginning of the second shift that the layoffs of their co-workers could not have any consequences for them.

The Effect of Layoffs on Survivors

We found that the layoff announcement decreased the remaining workers’ performance by 12% (Figure 1). In the ‘layoff’ treatment, workers took a longer break at the beginning of the second shift, and they left their workplace earlier than in the other treatments. The layoff announcement also lowered the quality of workers’ output.

In contrast, there was no significant difference in performance between our ‘no-layoff’ and ‘quasi-layoff’ treatments. The reduction in staff size per se had no effect on performance. Further robustness checks revealed that our treatment differences were not driven by a change in beliefs about the importance of the job, or changes in perceptions of the management’s competence. Since our employees worked in single offices, and few of them had social ties to employees from other treatments, we can largely rule out peer effects.

Figure 1 Difference in performance (number of calls made) between the first and second shift in the ‘no layoff’, ‘quasi-layoff’ and ‘layoff’ treatment

Source: Heinz et al. (2017).

After the field experiment, we conducted surveys with our workers. Overall, workers in all treatments were quite satisfied with their salary, the management’s behaviour towards them, and the atmosphere in the call centre. The remaining workers in the ‘layoff’ treatment, however, were significantly less satisfied with management behaviour towards their colleagues than the workers in the other treatments. We also asked workers from the ‘layoff’ treatment which parts of the layoff announcement they considered anti-social. Their answers indicate that they saw the layoffs per se, and the random selection of workers, as particularly unfair.

To back up our interpretation of the data, we conducted a prediction experiment with 43 professional human resource managers from medium-sized and large companies in Germany (they had, on average, eight years of professional experience). We explained our call centre setting and our treatment variation to them, and then asked them to predict the change in workplace performance between the first and second shifts.

The HR managers’ predictions were remarkably accurate, in the aggregate. They predicted that performance in the ‘layoff’ treatment would drop significantly between the first and second shift, and that would drop only slightly in the other treatments. A large majority of the HR managers mentioned fairness concerns as the main reason for the performance reduction.

Maintaining Productivity During Layoffs

Our results imply that unfair behaviour towards workers can be costly for the employer, even if the only workers who are directly affected have quit the firm. This is important for any organisation that has to accommodate economic shocks by reducing labour costs.

To reduce or mitigate the costs of supposedly unfair acts, organisations could apply a number of HR practices. They could use HR practices that avoid layoffs (for example using natural fluctuation in the workforce). They could provide severance pay or outplacement services. They might shift the blame to interim managers or business consultants. They could also separate profitable and unprofitable business units, and downsize only the unprofitable units. These practices may help employers to maintain a productive relationship with their workforce.

If the bigger rat does not let the littler rat win around a third of the time the littler rat rapidly loses interest in continuing to play. If you can persuade your employees that your goals and their goals are pretty parallel, productivity goes way up. If they think all you care about is getting the most work for the least money, all they are going to care about is doing the least work for the most money. This is a huge Dis-incentive. Huge. Of course 80% of the employees only account for 20% of your profits so there isn’t that much to worry about. Or something like that. I lost track of all the stupid explanations I heard.

” If you can persuade your employees that your goals and their goals are pretty parallel, productivity goes way up.”

Sorry, have to call bullcrap on this mindless HR twit meme commenter mentions.

About the only goals of corporateAmerika the past some decades have been to offshore as many jobs as possible, offshore technology, and do everything possible to inflate their, and their masters (the super-rich) financial assats.

Massive stock buybacks, borrowing for make shareholder dividend payouts, etc., has nothing to do with business progress and amortization.

Another animal example is the crab-in-the-bucket. One tries to escape and the others pull it back in. There are dysfunctions and disincentives in some organizations that push employees into such behaviors. Now, where is that list of company stocks to short?

This article is concerned about the right issues, but for the wrong reasons, and ends up with some bad suggestions. That anyone has to provide a business case for avoiding unfair treatment of employees, I think, speaks volumes. And how off-track the authors are shows up at the end. You see, the problem is not how to avoid unfair treatment of workers, but how to avoid the perception of unfair treatment…but barring that, just blame some middle-manager.

To reduce or mitigate the costs of supposedly unfair acts, organisations could apply a number of HR practices….They might shift the blame to interim managers or business consultants.

How about they start by cutting salaries, rather than cutting jobs, starting with the highest-paid employees, the C-suite, who can take the largest hit with the least effect on lifestyle? How about we just ditch the C-suite all together and start a worker co-op, where we treat each other fairly because we care about each other and want to do well together, not because we’re trying to extract as much value from each other as we can?

And how employers pay us back for the last 35 years of productivity gains that haven’t shown up in our wages? You want us to work harder for your benefit? Not gonna happen.

I’ve been through dozens of layoffs in my career – mostly surviving, but sometimes being in a department that gets the axe. I have seen first hand that these events impact productivity. But I think the study is a bit weak at demonstrating this impact. First, it measures only the next shift after the layoffs. I think just about anything that is newsworthy will have a similar impact in the immediate aftermath. The manager got reprimanded in front of everyone? Lower productivity. The local team lost a championship match the previous night? Lower productivity. Rumors of office romance? Same.

What is more interesting, in my view, is the impact on medium/long term productivity (weeks, months). Not just because of the unfairness of it and what that does to morale, but because the remaining employees will inevitably struggle to put in place new communication channels, understand changed roles and responsibilities, what gets dropped after certain colleagues have exited, who will pick up new projects, etc. Here again I have seen first hand the disaster of colleagues trying to pick up the pieces of projects from those laid off. 1/2 of the time, a project after the layoff is just abandoned (“It didn’t make much sense…”) only to be restarted a few months later when others realize WHY it was valuable in the first place (at great additional start-up and learning costs). Because it looks bad for management to have made a mistake, many companies have policies that prevent hiring back laid-off individuals.

I agree wholeheartedly that 90% of the time bad management is to blame for the layoffs. Once in a while, there is a true cash flow problem due to unforeseeable events. But mostly it’s just an inability to identify/assess what’s important and/or an unwillingness to invest in people to deliver what’s important. The worst is that it’s always the firing manager who comes off the worst, when the decision is driven by a brutal, ignorant financial decision by some excel jockey in finance.

Also, the methodology of their study is laughable. You think you can hire people for one day of work and extrapolate from that to behavior in a real world setting?

Also, did any of these knuckleheads stop to consider the possible negative psychological effects of the let down for the test subjects of getting what they thought was going to be a job, only to be laid off on day one? A bit on the dispiriting side, donchathink? How the f did that one get by the IRB? “Let’s use unemployed people as lab rats to perform experiments so we can give corporations advice on how to squeeze the most out of their workers.”…sounds legit….

Yes. But that also suggests that nothing new was learned by this experiment, that industry already understood this effect. So what was learned here that could be learned by going through existing literature?

I also find it hard to believe that this went through ethical review. They’re in Europe, so the rules are different, but the fact that they make no mention of any review of their study tells me that they didn’t do it.

The psychological effects are one thing. But this actually deprived people of money, as far as I can tell.

I’m actually going to email their universities right now. This is pretty exploitative.

Here I thought that the article was going to talk about unfair management practice among employees and it turns out to be about layoffs.

Oh well.

At our company there are two employees who have been with the company since near the beginning. They are within 5 years of retiring. One, an engineer, works as hard as ever. Putting in extra hours, mentoring younger engineers, etc. Among the engineer intern staff he is as a God. The other, a technician, is the complete opposite. Figuring he’s earned his right to slack, he wanders in any old time, flaunts HR directives, watches baseball in a corner of his computer screen, spends endless hours shopping, etc. The rest of us figure he maintains employment purely on loyalty (longevity) and because “he knows where the bodies are buried”. When deadlines near everyone’s stress level increases because of this slacker. He openly mocks co-workers who display a strong work drive. He’s jovial, appears happy, and decreases productivity of everyone he’s around. Because management appears not to care about the unfair amount of leeway this employee is afforded, they are dragging the company down.

Is productivity and efficiency really of concern to those who ‘manage’ our firms? It seems to me the high level ‘managers’ are most concerned about their pay packages which depend more on share prices than productivity. Concerns about productivity make a nice club for beating down the middle-management overseers and the employee wage slaves.

How many of our firms are operating at their peak capacity to meet some high demand? Why would high level ‘managers’ worry about productivity when wages are low, stock prices are speculative, and the government is handing out free loan money which can be used to drive up stock prices. Is it perhaps an indication there’s not much profit left to leverage into executive pay?

There is a reason corporations tend to die. Young corporations are founded with a culture concerned with competing in the marketplace, and they as a result they might grow up to be big and strong. Then the outside pressure and creative force of the founders is gone and the management starts to look out for what they can get out of the corporation. Eventually the corporation dies. Or it would, were the whole system not so corrupt that the state will bail out the powerful corporations endlessly.

I don’t see mentioned specifically in this article that extra workload assumed by the remaining employees, jobs consolidated by an efficiency expert, probably, with no respect to workflow and task flow. This can definitely affect productivity and equanimity. I have been through this and everyone knows it’s not about efficiency, the consultant grabs their fee and gallops off to the next execution.

I’m tempted to weigh in here concerning the “worms eye view” of this subject. However, I had to swap my Friday at work for a Saturday at work with another employee of The Chicken Palace. Why? He has to attend a sisters’ funeral Saturday. She died suddenly from a complication attendant upon surgery. The store manager told him that the only way he could have the day off was to arrange a swap with someone else working there. Surprise! I was one of only two possibilities for this man. The other later communicated willingness to cooperate if need be.
The store manager was later quite cross with me for “falling for” such an obvious strategem.
Him: “You’re my best warehouse guy.”
Me: “But so and so can do the same job quite well. He’ll be there Friday.”
Him: “But he’s really good at putting stuff on the shelves. Having him run the forklift is a waste of talent.”
Me: “So, you’re telling me that this store is really thin on talent overall. why not hire a few more people and beef up your talent pool?”
Him: “I just don’t have the labour budget to hire any more people.”
Me: “Hah! You mean that your bonus would be negatively affected if you hired enough people to run this place, eh?”
Him: “We definitely will not go there. Back to work!”
This is a reconstruction of yesterdays’ conversation to the best of my prion addled brains’ ability.
One of the secondary managers asked me a few weeks ago; “How do you get away with asking such really disrespectful questions?” To which I replied; “I’m too old to be a threat to anybody. Passive aggressive does the trick.”
She just laughed and walked on.
Time soon to go out and do some very judicious Christmess shopping.
Joyous Noel!

Well I could write a book on this kind of stuff. I’m the President of a boutique contract SW Engineering house and have had a ring side seat at everything SW related for the last ~33 years or so…

I’m watching a client run through this very scenario right now. They just injected a fresh crop of MBA drones into the management stack on an ongoing, very successful product line. The first order of business was to terminate the 2 senior engineers, with approximately ~84 years of product expertise… Then promise their customers a number of deliverables that are going to be impossible to produce given the complete chaos injected into the division. So far, by my estimate, they’ve spent almost $1 Million dollars of NRE just trying to recover their SW product build process for this one product line…

On other side of the division, they terminated a team of ~12 (not sure) engineers working on a DoD contract with a multi-million dollar non-performance penalty… That they will have to pay, because with the team gone, they can’t deliver. Not only that, they fired the guy with the only credentials to access the DoD contract management portal… So for a couple of weeks they couldn’t even access the contract details through the portal, to understand what they were supposed to deliver. (So I heard…)

On a meta note, it’s interesting they were soliciting input from *German* HR professionals.

In my experience negotiating SW contracts, there is a marked difference between the approach of US companies and our foreign clients. The US companies start the negotiation by talking *cost* first[1]. If we get past that, we can start discussing what they want done and when they want it. With European and Asian companies, it is always what can you do and when can you do it. At the end, with them, we’ll discuss price, but by then it’s almost an after thought. Some times if they don’t have the budget for the whole thing, we’ll do it in pieces. So they pay for the first phase, and if it goes well they’ll pony up for the future work.

Frankly it’s getting almost impossible to find management at big American companies that understand technology, or even understand what their companies even sell/do. The small and mid size companies have people at the middle layers that understand how the world works, but I’m wondering how long that is going to last..

[1] Which reminds me of the time, at an Embedded System Conference in the Moscone Center, I wound up standing on the show floor in our booth, listening to a Business Unit Manager from a Big Chip Co[2] scream at me that “You’re just a programmer, you should work for $20/hour, because I don’t care if my projects ever get done or ever work…” (His voice was loud enough that passers by and other booth folks had stopped to watch/listen to our conversation.) Which floored me at the time, but since then, I’ve heard variations on that from lots of American managers and C level types…

[2] You’d recognize them, they have a brand name recognized world wide in the PC/Server market…

That shoots my day to hell. With everything else gone, the one thing I thought we had left was that MBAs could read a contract. I thought that was the one thing they could do. What did school teach them?

My picture of the modern corporation was: a CEO, a secretary, a file cabinet full of contracts, and an entourage.

Oh you’d be surprised at what doesn’t get read anymore. I’ve noticed a trend recently where clients are knowingly violating software license agreements or terms of use clauses… These are bigger companies that should know better. Again, I’ve only started to notice this in the last 3 or 4 years…

I mean 20 years ago, it was someone hanging out a shingle as an “Independent Graphics Artist” and running a bootleg copy of Photoshop. Now it’s companies not tracking their shipping SW products to ensure they aren’t violating 3rd-party or GPL terms. Or misusing single use license SW tools in corporate network environments.

This latest go ’round was instructive as two of the people let go included the Business Contact responsible for our contract and the Technical Contact responsible for evaluating our performance and directing our work. I had to walk our client through the steps, called out in our SSA, of how to notify us in writing who our new contacts on the business and technical sides would be. Plus we needed to know if they wanted to modify the SOW based on the changing business conditions, or exercise the termination clause. It was surreal, I’ve never had to notify a client of their contract obligations before in a situation like this…

“You’re just a programmer, you should work for $20/hour, because I don’t care if my projects ever get done or ever work…”

There is a lot of weird crap going on these days, in corporations, in Washington, even in science. I wonder are antidepressants warping minds or is it pesticides? There seems to be an epidemic of delusional thinking.

Even a sales clerk at some store needs some training, and practice to be competent; yet cutting back the training, reducing any sort of support as in supervisors, or experienced workers being paid a little more, is looked as a goldmine to be emptied. Then performance drops, complaints explode, theft increases,profits go by-by and all they think of is cutting even more after blaming the lazy workers. I’ve seen this more than once, and I am always surprised. They want to increase profits by cutting, instead of increasing profits by growing.

We had a laugh amongst ourselves with regard to that term. I had his business card for a long time, but tossed it when we moved our office a while back. The company in question has gone through several reorg drills over the years since then. To my knowledge they no longer use that term.

This strikes me as your typical “water is wet” research project. The topic is certainly worth exploration, but I am not sure what this experiment is supposed to test for. True, a layoff of 20% is bound to impact your workers’ productivity, but a lot of events could do that and not involve management at all, good or bad. For example, a college suddenly has a stroke and dies on the work floor, while peers look on helplessly. And after the fact, the empty cubical as a reminder of the tragedy. Or maybe a fire in the brake room, or a shooting in the parking lot. Positive events might also have an impact, such as the marriage of coworkers and the peers wanting to throw a party in the office space. Or the must-see movie is out in theaters and 20% of the work force calls in sick.

This seems to be the consensus of the room, that the experiment is too simplistic. Was the productivity decline the consequence of bad management, or just human nature when dealing with trauma? Humans are not machines, so it shouldn’t surprise us when the respond to changes in their environment.

I also question the necessity of the experiment itself. I would think it far more informative to examine real world conditions, such as looking at real work places that have gone through layoff phases in the past. I suspect that such findings would produced a far more mixed result, with some layoff helping productivity, and other hurting productivity, depending on the conditions that proceeded the layoff in the first place. One could also look at a larger array of work conditions that might produce drops in productivity.

The conclusions in the study here reminded me of a business book that I read once. It mentioned that whenever consultants are called in to do a study, they first find out the most important thing. That is, whether management really wants to learn and understand something new or whether they just want a study to confirm what they are thinking and want to do anyway. The total lack of imagination in the conclusions leads me suspect the later. Especially the casual cruelty to the guinea pigs in the experiment.

For what 30 years? I have lived through and read about and worked with victims of previous such improvements. It always seems to end badly for the companies.

So as I am typing this I remember seeing news of closures of tool and die makers, fancy glass, high and then low end clothing, specialty manufacturers of all sorts of stuff from the 1980s during the “greed is good” time. The list just goes on. Before all that electronics and furniture. Then in retail the shop talk is all about how various individual stores and then the whole chains are just efficiencied to death like how some people cannot see their true weight and starve to death. All the employees and most of a store’s and mid level management can always see this, especially if they’re old timers. But not the people in charge.

Some how there are always more MBAs with the same plans to cut a company to death for more “profit.” And I’m thinking of all those people with all their knowledge at all those companies just… thrown away because somehow that’s profitable.

BTW I think this also happens in government too. I don’t know much about that but hearing people complain about yet another 5 year plan done for 3 years to improve the school system or how they always have money for those well paid consultants or for the senior administrators’ large staff but teachers and school supplies not so much.

I’m a little surprised this paper got past an ethics board to actually carry out this “experiment.” To use Glengarry Glen Ross language, “Third prize you’re in the treatment-group.”

I knew (saw) how people could get away with this kind of “randomized control trial” in desperate West African countries, but surprised to see economists placidly running these in presumably the nice EU countries they live in (Germany in this case, I gather).

Think about this for a minute.

In our new study, we set up a field experiment to measure how unaffected workers react to unfair employer behaviour (Heinz et al. 2017). We rented a call centre and hired 195 employees to conduct a telephone survey in two shifts. Overall, our organisation was very employee-friendly – we paid a generous hourly wage, offered flexible work times, a pleasant work atmosphere, and full discretion to workers how to perform their job. We measured individual performance precisely by the number of calls each worker made during a shift.

We used three treatments to identify the effect of unfair employer behaviour on the performance of unaffected workers:

In the ‘no-layoff’ treatment, staff remained unchanged for the second shift

In the ‘quasi-layoff’ treatment, we reduced our staff by 20% between shifts, but did not say there had been a layoff to the remaining workers (they were told only that fewer staff would be present for the second shift

In the ‘layoff’ treatment, we reduced our staff by 20% and communicated the layoff to the remaining workers: “The reason for this [the staff size reduction] is that we decided to lay off some of your colleagues. This allows us to reduce our costs. The selection of laid off workers has been random,” we told them.

So, assuming these 195 were divided into thirds (65 persons per “group”), a total of 26 people had the experience of being fired, and btw being fired from a job that was “employee-friendly – we paid a generous hourly wage, offered flexible work times, a pleasant work atmosphere, and full discretion to workers how to perform their job”, so presumably a kind of dream-job given what call-center jobs are usually like. Those 26 people had a very rough day, and if they’re taking call-center jobs they’re hardly likely to have had the income position to feel very equanimous about, for example, being told the reason they don’t have an an income is because “[T]he selection of laid off workers has been random”. And I imagine it wasn’t a great week for their non-fired peers in each of these two “treatment” groups.

I can’t quite finish writing any sentence about how grotesque I find this Glengarry Glenn Field Experiment except by saying, imagine if this kind of study had been done regarding the productivity of postgrads or journalism interns or junior law partners or any other occupation where the kind of person who becomes a “Professor of Personnel Economics” might actually imagine a family-member or close friend actually working in.

There was another experiment of this type with buses. Its details are some lost to me. Something went wrong. There was success when there was not supposed to be success.
The history of DuPont & GM is likely as ethical an experiment around. Ends up needing government help.
Ford does not.
As Jared Diamond said it would be unethical to conduct the experiments, but history shows they have all been tried. History & Political Science are then the same thing.
It is sociology which is psychology first, then everyone gets it like a cold, or the flu going around.
Far as I can tell all that MBAs are taught is to never pay labor.
The US can be seen as one big company. 22 million out of 154 million work directly for it.
All of the failures of Rome mean nothing, so must be replayed.
Thanks to all for their comments & to Editor Yves for allowing us to think of these things together.
“God Bless, don’t get the plague.”